Imperfection Information, Optimal Monetary Policy and Informational Consistency

Paul Levine (), Joseph Pearlman and B. Yang

Working Papers from Department of Economics, City University London

Abstract: This paper examines the implications of imperfect information (II) for optimal monetary policy with a consistent set of informational assumptions for the modeller and the private sector an assumption we term the informational consistency. We use an estimated simple NK model from Levine et al. (2012), where the assumption of symmetric II significantly improves the fit of the model to US data to assess the welfare costs of II under commitment, discretion and simple Taylor-type rules. Our main results are: first, common to all information sets we find significant welfare gains from commitment only with a zero-lower bound constraint on the interest rate. Second, optimized rules take the form of a price level rule, or something very close across all information cases. Third, the combination of limited information and a lack of commitment can be particularly serious for welfare. At the same time we find that II with lags introduces a ‘tying ones hands’ effect on the policymaker that may improve welfare under discretion. Finally, the impulse response functions under our most extreme imperfect information assumption (output and inflation observed with a two-quarter delay) exhibit hump-shaped behaviour and the fiscal multiplier is significantly enhanced in this case.

Keywords: Imperfect Information; DSGE Model; Optimal Monetary Policy; Bayesian Estimation (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-cta, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cty:dpaper:13/13

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